“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
A critical pearl of wisdom from Warren Buffett teaches us that with any potential stock investment we may make, as soon as our buy order is filled we will have a choice: to remain a co-owner of that company for the long haul, or to react to the inevitable short-term ups and downs that the stock market is famous for (sometimes sharp ups and downs).
The reality of this choice forces us to challenge our confidence in any given company we might invest into, and keep our eyes on the long-term time horizon. The market may go up and down the interim, but over a five year holding period, will the investment succeed?
Back in 2016, investors may have been asking themselves that very question about Northrop Grumman Corp (NYSE: NOC). Let’s examine what would have happened over a five year holding period, had you invested in NOC shares back in 2016 and held on.
| Start date: | 02/18/2016 |
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| End date: | 02/17/2021 | ||||
| Start price/share: | $192.68 | ||||
| End price/share: | $297.18 | ||||
| Starting shares: | 51.90 | ||||
| Ending shares: | 56.16 | ||||
| Dividends reinvested/share: | $22.93 | ||||
| Total return: | 66.90% | ||||
| Average annual return: | 10.78% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $16,688.93 | ||||
As we can see, the five year investment result worked out quite well, with an annualized rate of return of 10.78%. This would have turned a $10K investment made 5 years ago into $16,688.93 today (as of 02/17/2021). On a total return basis, that’s a result of 66.90% (something to think about: how might NOC shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Northrop Grumman Corp paid investors a total of $22.93/share in dividends over the 5 holding period, marking a second component of the total return beyond share price change alone. Much like watering a tree, reinvesting dividends can help an investment to grow over time — for the above calculations we assume dividend reinvestment (and for this exercise the closing price on ex-date is used for the reinvestment of a given dividend).
Based upon the most recent annualized dividend rate of 5.8/share, we calculate that NOC has a current yield of approximately 1.95%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5.8 against the original $192.68/share purchase price. This works out to a yield on cost of 1.01%.
More investment wisdom to ponder:
“You can’t be a good value investor without being an independent thinker; you’re seeing valuations that the market is not appreciating. But it’s critical that you understand why the market isn’t seeing the value you do.” — Joel Greenblatt
